March Client Letter

Tariffs and economic uncertainty

Following the election, optimism surged amid the belief that the new president would follow through with plans to pare back regulations that stifle businesses and extend the tax cuts passed in 2017.

From an investor's perspective, so far, so good.

But candidate Donald Trump also pledged that he would enact tariffs on countries he believed were not playing fairly with U.S. manufacturers and U.S. exporters.

The 47^th president has been in office for just over one month, and he’s wasted little time on the tariff front.

But why are tariffs important to investors? A better question is: Why do investors fear tariffs?

Sweeping tariffs have the potential to affect the broader U.S. economy.

• First, tariffs are a tax, and tariffs on imported goods will raise prices at home if the importer or retailer doesn’t absorb the new tax. The significant increase in levies on Canadian, Mexican, and Chinese goods strongly suggests they cannot be fully absorbed, which would lead to higher prices. According to the U.S. Census, these three nations are the top providers of goods imported into the United States ($1.4 trillion last year).
• Next, barriers erected by the U.S. will likely be met by higher barriers for U.S. exporters as countries retaliate. That may restrain production among U.S. manufacturers.
• Tit for tat: Investors are also worried that countermeasures could lead to a rapid escalation of any trade war.
• Finally, tariffs introduce uncertainty into the economic narrative, which may undermine business and consumer confidence. In turn, businesses may reduce spending until the dust settles.

Meanwhile, various economic reports suggest that U.S. economic growth may be slowing down. However, we also recognize that economic data can fluctuate from month to month, and one month does not establish a trend.

The market has been experiencing a drag in February and March, following a strong start in January. The uncertainty surrounding government funding and the duration of tariffs is contributing to this volatility.

The government funding deadline on March 14th is a significant event to watch. Historically, government shutdowns have varied in length from 2 to 35 days, and their impact on market performance has ranged from -4% to +10%. It's essential to stay focused on long-term goals and not get swayed by short-term volatility.

It’s possible that the recent slowdown in economic activity is related to the weather, as some parts of the nation have experienced severe cold.

Nonetheless, we have seen a rotation out of riskier segments of the market and into more defensive issues. Although the major U.S. indexes fell last month, the Dow, which has underperformed in the past two years, is emerging as a frontrunner as we begin 2025.

Additionally, bonds have been a beneficiary of market uncertainty.

One thing to note based on Bloomberg ICI there is almost 7 trillion in cash sitting in money markets.  People are content at this point to keep cash on the sidelines and are in fact keeping it in money market instead of going into bonds.  I don’t believe the amount of cash on the sidelines will be the catalyst that drives the market forward but corporate profits.  It is certainly something to keep in mind but fundamentals will be the driver.

Source: The Wall Street Journal, MSCI.com, Bloomberg, MarketWatch
MTD returns: January 31, 2025–February 28, 2025
YTD returns: December 31, 2024–February 28, 2025
**in US dollars

Quick mention on Social Security

There are two opposing opinions on Social Security. On one hand, if Trump and Musk's efforts to eliminate waste, fraud, and abuse are successful, it could indeed strengthen the Social Security system and ensure uninterrupted benefits. On the other hand, severe staffing shortages and Musk's aggressive approach could potentially cripple the system, making it difficult for people to access their benefits.

The Social Security Administration's (SSA) redeployment of staff to direct-service roles and their quick processing of WEP adjustments for the Social Security Fairness Act are positive signs. However, the reliance on old technology and the potential loss of experienced staff could pose significant challenges.

It's a delicate balance, and the outcome will depend on how well these changes are managed and whether the promised efficiencies can be realized without causing disruptions to the system.

I know we all worry one way or another.  Only time will tell.  I am here to help answer any questions you may have.

Final thoughts

There are few indications today that the economy is poised to roll over.

S&P 500 profits were strong in the fourth quarter and are on pace to rise 17%, according to LSEG. Earnings growth and stable interest rates have clearly underpinned equities.

But we are mindful that market pullbacks cannot be discounted, even during an economic expansion.  Pull backs are actually healthy even during a bull market.

We have had discussions with you that have enabled us to design a roadmap to achieve your financial goals. This roadmap allows for increased objectivity and helps remove emotional biases that can sometimes infiltrate the decision-making process.  A

A diversified portfolio cannot completely shelter you from market pullback, but it helps reduce volatility while tapping into the wealth-creating potential that stocks have offered over the long term.  Now that we have seen the direction this administration is taking, we have a better idea of which direction to go.  Rebalancing during times of volatility can help keep your portfolio on track moving forward. I will reach out in the next couple of weeks to everyone, as the portfolio reviews have been completed.

I trust you have found this review to be informative. If you have any inquiries or wish to discuss any other matters, please do not hesitate to contact me or any team member.

Thank you for choosing us as your financial advisor. We are honored and humbled by your trust.

Cheryl L. Myler, CRPC

Vice President – Wealth Management Advisor

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The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index. The MSCI ACWI ex USA Investable Market Index (IMI) captures large, mid and small cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 24 Emerging Markets (EM) countries*. With 6,211 constituents, the index covers approximately 99% of the global equity opportunity set outside the US. The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index's three largest industries are materials, energy, and banks. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.